There is a common narrative that the government has reduced total social spending to the detriment of service delivery, particularly for the unemployed and poor.
A look at nominal consolidated total government spending shows several characteristics of the budget that exhibit a path to a welfare state that, if not reversed, will lead to ruin and the reversal of the social protection that currently exists. The prevailing push to expand a debt-funded social wage takes the country further on the path to a debt default.
The risk in this is an assumption of South African exceptionalism that comes from our exemplary democratic transition. It creates a false sense that ours will never be the Venezuelan, Argentine, Zimbabwean or, even more recently, Zambian experience of debt default.
An examination of the budget proves that SA’s exceptionalism is a fantasy.
I looked at the changing consolidated government spending patterns since fiscal year 2005/06, throughout the Covid-19 crisis to the projected framework up to 2023/24.
In 2005/06, consolidated government spending was R474.8bn, of which 68% was social spending, defined here as the total of social protection or grants of various types ( for example, child support), education, health, housing and community amenities, public order and safety, transport, recreation and culture.
Other non-interest expenditure, largely economic affairs, defence and public services, constituted 21% of spending. Economic affairs include direct spending on sectors such as agriculture, mining, manufacturing, construction, communication and fuel and energy. This is investment into the economy that increases productive capacity, economic growth and employment at a faster pace than any other spending.
Total social spending has been rising since the mid-2000s until the 2019/2020 fiscal year, then it jumped when the pandemic hit in 2020/21 before declining in 2021/22. For the next two fiscal years, social protection is forecast to grow by 1% each year.
Between 2005/06 and 2009/10, total consolidated spending rose by 74% to R824.1bn. The fastest growth happened in recreation and culture, with an average annual growth rate of 39%, followed by transport, which grew by 31% a year. Spending on health was the third-fastest growth item at 17% a year, followed jointly by education and housing and community amenities at 16%.
Total social spending grew by an average of 16%, and other non-interest spending, most of which is direct spending in sectors of the economy, grew by 15%. Social spending and investment into productivity-enhancing economic sectors grew at roughly the same pace. Debt-service costs grew by an average of 3% over the same period.
Failure to reduce debt will push SA further along the path of rising debt-service costs, requiring public investment to be cut. Eventually, when there is nothing else to be cut, social spending will have to be cut
This was the best of SA’s budget framework, with roughly the same growth in social spending and investing in economic infrastructure, coupled with lower growth in debt-service costs, thanks in part to the fiscal consolidation of the mid- to early 2000s that reduced apartheid debt significantly.
From 2010/11 to 2019/20, a lot changed in the wrong direction.
Debt-service costs accelerated by 13.6% on average, becoming the fastest-growing expenditure item in the budget.
Growth in non-interest spending on productive economic sectors more than halved to 6.1% from 15% before the global financial crisis, and transport spending moderated from an average of 31% before the crisis to 3.6%. Education and social protection grew by an annual average of 9.2% from 16% and 14% respectively. Health grew by 8.9% from 17.0%.
What is clear is that the growth in debt-service costs meant everything else had to slow down significantly — largely spending on transport and economic services, which directly affect productivity.
Effectively, the government chose to reduce the enhancement of the productivity of the economy to maintain social protection. It chose slower growth in jobs for maintaining the social wage.
In 2020/21, social protection grew by 43% and total social spending increased by 15% from an annual average of 8.3% in the decade before. Meanwhile, recreation and culture were cut by 15% — understandably as the economy was in lockdown. Spending in economic services that improve productivity and public order and safety all moderated further to 2% from 6.1% and 7.5% annual average growth in the previous decade.
While everything made way for social protection, debt-service costs continued to rise by 14% from a 13.6% annual average in the past decade — and is still projected to grow by an average of 13% in the medium term.
There are three things we can take away from these spending patterns.
First, those who say debt doesn’t matter are simply misinforming the public because we know it is from rising debt that debt-service costs rose, leading to cuts in investment.
Second, those who say increasing the social wage through a debt-funded income grant will lead to faster economic growth and more jobs are misinforming the public as the last decade showed that SA’s economy does not work that way.
Third, failure to reduce debt will push SA further along the path of rising debt-service costs, requiring public investment to be cut. Eventually, when there is nothing else to be cut, social spending will have to be cut.
It is clear from this history of SA’s economic performance that the best way to achieve social welfare is through savings and investments in the productive sectors of the economy.
Increasing debt or taxing the economy might increase social welfare for one or two years, but the impact of these on the economy will more than reverse the short-term benefits over the long term, including through a debt default.
• Mhlanga is chief economist at Alexander Forbes and an Economic Research of Southern Africa fellow
